Bail-in vs bail-out: Bank resolution and liability structure

Luca Leanza, Alessandro Sbuelz and Andrea Tarelli

International Review of Financial Analysis, 2021, vol. 73, issue C

Abstract: What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: (1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; (2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and (3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.

Keywords: Bank capital structure; Endogenous default; Bail-in; Bail-out (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G32 G33 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:73:y:2021:i:c:s1057521920302830

DOI: 10.1016/j.irfa.2020.101642

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